Updated: Sep 21
Applying for a small business loan can feel overwhelming, especially if you’re new to the game. Fortunately, most lenders have online applications that make the entire process easier than it used to be. It’s still helpful to gain some knowledge before applying so you know which option suits your needs best. We’ve put together a list of key steps to help you succeed.
Step 1: Define what you’re trying to achieve
Be clear with yourself about why you need the loan. What are you going to use the loan for? Are you smoothing out cash flow, buying equipment, or investing in marketing? Base your request on your specific needs, not a generalization.
Get specific about how much money you really need. If you borrow too little, you can’t cover your expenses. If you borrow too much, you’ll end up paying more interest than necessary. Figure out how much you really need to cover your planned expense, and confirm you are able to pay it back over the time-frame that will likely be required.
It’s smart to have a business plan, even if your lender doesn’t ask for one. This will help you organize your ideas, better understand the market, and layout strategies for growth and success. It will also give you, and your lender, a better understanding of your expenses and cash flow, which will show how much you need to borrow and how you’ll be able to comfortably pay it back.
Step 2: Address your business and personal credit scores
A great credit score helps you qualify for a loan and also opens you up to better rates and term offers. And with small business loans, lenders look at both your personal and business scores.
Understand that your credit score isn’t everything – online lenders have other ways of figuring who’s eligible. These lend
ers have newer digital algorithms and underwriting methods that factor into things like cash flow, yearly revenue, industry, how long you’ve been in business, and financial forecasts. Lenders want to see a history of on-time payments on loans, credit cards and vendor contracts, so make sure your accounts are up to date.
If your business is new or your credit score isn’t great, you may still be able to borrow; your options will just be more limited, and you may pay higher interest rates. If you’re concerned about your credit score or haven’t checked it in a while, check your score on Experian, Equifax®, or Transunion.
Step 3: Get yourself organized
First, make sure you have separate personal and business finances. At a minimum, if you’re paying invoices with your personal credit card or putting your profit in your family savings account, you should stop doing so immediately. Your business should have its own business bank accounts and credit card, which is best practice and will keep your business and personal credit histories separate. Also make sure your business is officially registered and has a Tax ID.
Finally, you’ll want to gather and organize
a list of documents your lender will need so you’re not scrambling at the last minute. If you’re applying online, make sure to scan everything so it’s ready for your application. Some commonly requested items from your lender might include your business name, your Federal Tax ID, legal structure and annual revenue, as well as recent bank statements. Having your documentation ready to go before applying will make applying faster and easier. And for the lender, this will show you’re not only organized, but also take the application process seriously.
Step 4: Consider which lending options might be right for you
There’s a number of different types of funding to consider, based on what your defined need is, and the current state of your business. Here’s the types to consider:
Traditional bank loans. A traditional bank loan is perfect if you have good credit, have been in business for a long time and aren’t in a rush to secure funding. If you have ever obtained a consumer loan (like financing a car or getting a mortgage), your experience with a traditional bank loan will be similar: the requirements to qualify for this loan are higher than requirements for other loan options, and the bank underwriting the loan will have strict, structured rules.
SBA loans. Another potential source of funding is the SBA loan. SBA loans are a great option if a bank has turned you down. However, expect to jump through several hoops in the application process.
Credit unions. Credit unions also offer loans. If your credit score is below 690 and you need a lower interest rate, a loan from a credit union could be a great option for you.
Alternative lenders. Additionally, there are alternative lenders who focus specifically on small businesses, such as BFS Capital. With a quick online app
lication and no upfront fees, it’s easier to secure one of these loans, even if your credit isn’t perfect or you haven’t been in business for 10 years, but they’ll come with a higher interest rate than a bank loan.
Crowdfunding and P2P lending. Outside of financial institutions, crowdfunding and peer to peer lending are interesting options. These funding sources rely on social circles and individual contributions, which can be difficult if your request doesn’t gain traction, but they can be successful for some businesses.
Step 5: Apply
Apply to your top choices -- not to every lender available. Every time a lender checks your credit score, your rating takes a tiny hit.
How to determine if a lender is right for me?
Make a list of questions. It’s important to understand what you’re applying for. Do you clearly understand terms, rates, fees, etc.? What’s the interest rate on the loan? Will it vary over time? What is the time-frame of your payment plan? Are there limits on how you can use the money? Can you pre-pay early without penalty? Do you need security or collateral?
Look for hidden fees. Some online lenders will charge an origination fee (a fee to process the loan – typically up to 2.5%) and other fees that take a chunk of your cash. There may also be underwriting fees, admin fees, and more. Many lenders have eliminated any hidden fees to make loans more transparent for customers. Always read the small print and ask as many questions as you want regarding fees and interest rates. Follow this up by doing the math -- the lowest interest rate might not be the best option if you’re paying large fees to receive it.
The importance of loyalty. Look out for lenders who want to build long-term relationships with you because they will offer perks for coming; such as discounted rates and better terms. It won’t hurt to ask what the next loan will look like, regardless if it’s your first loan with them.
Apply to 3-5 options and carefully compare their offers. If there’s a lender you prefer, but they’re slightly less competitive than another offer, ask them if they can match it - sometimes but not always, there is room for negotiation. Just make sure you’re really comparing apples to apples - and if you’re not sure, don’t be afraid to ask questions!
Getting a business loan takes some work, but once you have a foundation for success, you’ll be able to find the right financing options to achieve your goals.